INTERNATIONAL ECONOMIC & ENERGY WEEKLY 14 OCTOBER 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000300140009-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 30
• Document Creation Date: December 22, 2016
• Document Release Date: February 18, 2011
• Sequence Number: 9
• Publication Date: October 14, 1983
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Directorate of
#l
Intelligence
Weekly
International
Economic & Energy
Seeret
DI IEEW 83-041
14 October 1983
Copy 5 8 4
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
International
Economic & Energy
Weekly
iii Synopsis
1 Perspective-Japan: Bracing for the President's Vis
it
25X1
25X1
Energy
Global and Regional Developments
National Developments
13 International Financial Situation: Political Stresspoints 25X1
25X1
17 The Philippines: Flirting With a Financial Fall
25X1
25X1
23 Indonesia: The Painful Consequences of Financial Austerity~_ 25X1
25X1
Yen Appreciation and Japan's Current Account Surplus 25X1
25X1
Comments and queries regarding this publication are welcome. They may be
directed tol Directorate of Intelligence
Secret
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
International
Economic & Energy
Weekly (U)
Synopsis
Perspective-Japan: Bracing for the President's Visit
Prime Minister Nakasone will try to focus President Reagan's visit to Japan on
global issues such as arms control in an effort to build his image as a world
leader. Nakasone realizes that Japan must offer some progress on bilateral
issues including defense and trade, but he has instructed his ministers not to
Political strains continue to mount in several key LDCs facing debt repayment
problems. F__1 25X1
The Philippines: Flirting With a Financial Falll 25X1
Indonesia: The Painful Consequences of Financial Austerity) 25X1
Indonesia is experiencing its second consecutive year of declining export
earnings and slower growth as the world oil glut and sluggish commodity
markets persist. The government is walking a tightrope between keeping a lid
on rising political tensions and waiting for a strong recovery in the world
make undue sacrifices to solve them.
International Financial Situation: Political Stresspoints
Despite Manila's devaluation of the peso last week and its new round of
financial austerity measures, the Philippines face a severe liquidity crisis.
economy.
Yen Appreciation and Japan's Current Account Surplus
With Japan's current account surplus headed for record levels this year and
likely to expand further in 1984, Tokyo has grown increasingly concerned
about protectionism in key foreign markets, particularly the United States.
Only a rapid runup in raw materials prices, a radical change in Japan's capital
account, or a much larger yen appreciation than is now foreseen would contain
the surplus.
25X1
25X1
25X1
25X1
iii Secret
DI IEEW 83-041
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
International
Economic & Energy
Prime Minister Nakasone will try to focus President Reagan's visit to Japan on
global issues such as arms control in an effort to build his image as a world
leader. At the same time, he realizes that Japan must offer some progress on
bilateral defense and trade issues and has instructed his ministers to examine
Weekly
Perspective Japan: Bracing for the President's Visit
these issues but not to make undue sacrifices to solve them.
Japanese bureaucrats feel pressure to make progress on economic issues
because Japan's current account surplus is growing rapidly at a time when the
US trade deficit is mounting. Tokyo realizes there are no quick fixes to Japan's
growing global surplus. Most officials view the import promotion measures
that are scheduled to be announced before the President's visit as window
dressing:
? The Trade Ministry reportedly is pushing for some economic stimulus
beyond the small cut in income taxes that is likely to be introduced; the Fi-
nance Ministry is opposed because of the budget deficit.
? For its part, the Finance Ministry is examining ways to induce foreign
investment into Japan to help appreciate the yen.
? Various ministries are arguing over how best to improve financing for
imports
The defense issue may be an equally difficult problem. Recent Soviet
actions-including the shootdown of the KAL airliner-have improved the
popular standing of the Japan Self Defense Forces. Nonetheless, many
Japanese officials are concerned that if Washington presses too hard for a
greater Japanese effort, popular opinion will swing back. Reflecting this,
Tokyo is quietly requesting a low-key US approach to the issue.
1 Secret
DI IEEW 83-041
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Nakasone is walking a political tightrope. On the one hand, he wants to
demonstrate that he can successfully manage the US-Japanese relationship
and that his ties to President Reagan are strong. On the other hand, with elec-
tions no later than next June, Nakasone does not want to alienate key
supporters in the Liberal Democratic Party, including farmers, by sacrificing
their interests in the bilateral negotiations with the United States.
Nakasone has not decided on the timing of elections for the lower house of the
Diet. We believe he will wait until after the President's visit. If it goes well,
Nakasone may opt to test his popularity at the polls as early as December.
25X1
25X1
Secret
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
secret
Energy
OPEC Production Con- OPEC production in September averaged 18.9 million b/d-the highest level
tinues Steady Climb this year. September's boost in production helped push the cartel's third-
quarter average 1 million b/d above the 17.5 million b/d self-imposed
quarterly ceiling established in March. Saudi production rose an estimated
700,000 b/d from August levels, primarily on the strength of short-term deals
that forced customers to accept increasing amounts of Saudi light oil in order
to obtain larger volumes of the currently more desirable heavier crudes.
Nigeria's production fell slightly below its allocation in September, partly
because deliveries to local refineries were more than 1 million b/d under
scheduled levels. Because of high output early in the quarter, however,
Nigeria's third-quarter production still averaged 100,000 b/d above its ceiling.
Total
17.5
18.4
18.9
18.5
Algeria
0.725
0.6
0.6
0.6
Ecuador
0.2
0.2
0.2
0.2
Gabon
0.15
0.2
0.2
0.2
Indonesia
1.3
1.4
1.4
1.4
Iran
2.4
2.5
2.5
2.5
Iraq
1.2
1.0
0.9
1.0
Kuwait
1.05
0.9
0.9
0.9
Libya
1.1
1.1
1.1
1.1
Neutral Zone
b
0.5
0.5
0.5
Qatar
0.3
0.3
0.3
0.3
Saudi Arabia
5.0 c
5.5
6.2
5.6
United Arab Emirates
1.1
1.2
1.2
1.2
Venezuela
1.675
1.7
1.7
1.7
a Preliminary.
b Neutral Zone production is shared equally between Saudi Arabia
and Kuwait and is included in each country's production quota.
c Saudi Arabia has no formal quota; it acts as swing producer to
meet market requirements.
Secret
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
According to US Embassy officials, a directive to restrict output in the fourth
quarter to within Nigeria's OPEC allocation has been issued to all equity
producers by the Nigerian National Petroleum Company. Other OPEC
members-Indonesia, Iran, and the UAE-continue to overproduce their
quotas. OPEC's four-member market monitoring committee has scheduled a
meeting on 27 October to reassess the market and compliance with the cartel's
production and pricing accord.
Soviet Gas Pipeline Moscow has announced that the Soviet minister responsible for overseeing the
Developments construction of the gas export pipeline to Western Europe has been named a
Hero of Socialist Labor, because the pipeline has been completed ahead of
schedule. The announcement is part of the Soviet propaganda effort to flaunt
pipeline progress despite US sanctions. Western engineers working on the
pipeline have reported that the pipeline is not ready for full-scale operation.
They say the Soviets may instead use domestic pipelines parallel to the export
pipeline to transport some of the initial gas to Western Europe.. The engineers
believe that the Soviets will be capable within the next three or four months of
delivering up to 9 billion cubic meters annually, using spare capacity from the
domestic pipelines. As a result, the USSR is likely to have little difficulty in
meeting export commitments to Western Europe in 1984.
West European Gas West European gas consumption rose 4 percent above year-earlier levels in the
Demand Rebounds first half of 1983, reversing the downward trend in demand begun in 1980. Gas
demand in West Germany-Western Europe's largest gas consumer-rose
nearly 1 percent, while France, the United Kingdom, and the Netherlands
experienced increases of 9, 7, and 5 percent, respectively. Increased gas use in
the residential and electricity-generating sectors accounted for most of the
additional demand. Rising gas use in Dutch electric power stations-a move
sanctioned by the Hague to boost gas revenues-accounted for nearly one-
third of increased West European demand
Progress on Spanish- Spain and Algeria have reached a tentative agreement on the price of LNG,
Algerian LNG Talks breaking a deadlock in negotiations that has lasted for almost a year.
Madrid has agreed to pay $3.94 per million
Btu, which is roughly equivalent to the price currently paid by Algeria's other
West European LNG customers. The accord probably means that Spain will
resume LNG imports, suspended since last November because of a pricing
dispute. Madrid reportedly has also offered to pay $60 million during each of
the next four years as compensation for its failure to take the full annual
contract volume of 4.5 billion cubic meters over the past six years. Final action
on the agreement is not expected until after Algeria holds its national elections
early next year.
Secret
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
secret
Gres ~~ oy
b
_ i ~6 m S
Moscow*
The Undid Stites Government has not recognized
the noorporetion of Eetonie. Latvia, end Lithuania
into the Soviet Union. Other boundary representation
is not neceeserily authoritative.
Caspian
\, Sea
Secret
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Sudan Pipeline A consortium of Italian, Japanese, US, and Saudi firms was selected last week
Contract Awarded to build a 1,500-kilometer pipeline from oilfields in southern Sudan to Port Su-
dan. Financing for the pipeline has not yet been completed, but Chevron, the
concessionaire, is optimistic the project will be completed on schedule in late
1985, according to the US Embassy in Khartoum. Unrest in southern Sudan
and an unreliable indigenous labor force could upset this timetable. Chevron
recently boosted estimates of oil availability from its fields; 60,000 b/d could
be produced today if the pipeline were in place, and 100,000 b/d may be
available when the pipeline is completed.
Possible Reopening of
Iraqi Pipeline
Through Syria
25X1
should the pipeline reopen, this would be a major shift in policy by
Syria, w ich has supported Iran for much of the war. President Assad
probably sees' an opportunity to extract additional assistance from the Saudis
and Persian Gulf states by going along with the mediation effort. In addition,
Syrian acquiescence in a move to help calm the crisis in the Persian Gulf
would boost Syrian aspirations to Arab leadership
Iraq's earnings could be increased by some 50 percent from the current level of
$7 billion annually even if only the Syrian part of the pipeline were opened-
there is a spur ending in Tripoli, Lebanon. This additional income would
reduce the pressures on Iraq to intensify the war in the Gulf. A Syrian
agreement to reopen the pipeline would be a serious blow to Iran; its hardline
position on mediation, however, probably will not change any time soon.
Secret
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
Major Iraqi Oil Facilities
Egypt
Saudi
Arabia
Oilfield
Oil pipeline
^ Pump station
?16- Oil terminal
Note: Pipeline alignments
are approximate
Soviet Union
KUWA~ Amay,
Kuwait Jerireh-ye
Kherk
/Kherk /slam
Secret
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
South African Coal South African attempts to market additional quantities of coal in the already
Pricing Jeopardizes depressed world market-especially in Western Europe and the Far East-are
US Exports likely to put downward pressure on world coal prices. Because South Africa is
one of the world's lowest cost coal producers, higher cost US suppliers will be
hard pressed to compete. In the past, port capacity constraints caused South
African coal exporters to follow the United States' lead in setting world steam
coal prices. With expansion nearly complete at the Richards Bay coal
terminal expect port capacity to reach 37-39 million metric
tons by 1984 compared with estimated exports of around 27 million tons this
year; South African coal exporters already are competing among themselves in
price-cutting wars.
Global and Regional Trends
Closer Canadian- Ottawa evidently hopes that improved relations with Beijing will facilitate
Chinese Relations increased trade. External Affairs Minister MacEachen and Foreign Minister
Wu met in Ottawa last week to exchange views on a number of bilateral and
international issues and signed a bilateral agreement laying the groundwork
for increased economic and technical cooperation. Ottawa's interest in better
ties probably results from its desire to attain improved access to Chinese
markets. The value of Canadian exports to China increased from $736 million
in 1980 to $1 billion in 1982, with grain constituting 60 percent of the total.
Canadian Wheat Board representatives are now in China, and prospects for
additional grain sales appear encouraging.
Canada also is seeking to sell China military and high-technology equipment.
the Canadians are trying to expand their role in developing China's
offshore energy resources. Two Canadian firms are participating in a consor-
tium that recently was awarded contracts by China's national oil company for
exploration projects in the South China and Yellow Seas. Canada hopes to
increase exports of energy technology, and the agreement signed by Wu may
lead to more trade in this field.
National Developments
Developed Countries
New Israeli The Israeli Cabinet announced several measures earlier this week designed to
Economic Measures stem the recent run on the shekel and cut government spending. The new steps
included:
? A devaluation of the shekel by 18.6 percent.
? A boost in most government-controlled prices by 50 percent, including the
price of bread and milk.
? A plan to give incentives to holders of bank shares to keep them for five
years.
Secret
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
The Cabinet was forced to act by the public's rush to buy dollars last week in
anticipation of a devaluation. Many Israelis sold stocks, particularly bank
stocks, for shekels to purchase dollars, precipitating a stock market crash and
forcing its closure for a week. Several factors fueled the run on the shekel:
? Recent press reports citing rising foreign debt and declining foreign ex-
change reserves.
? A public perception that the government was doing little to correct economic
problems-triple-digit inflation and a poor export performance leading to a
growing trade deficit.
? A similar but less extensive run on the shekel in August resulted in a 7-per-
in January when wages and pensions are adjusted for inflation.
The Histadrut, the large labor organization, took the relatively mild step of
striking for two hours on Thursday. Press interviews with Israelis indicate that,
although people are not happy about the moves, they accept the need for
stringency. We believe, however, that support for the Shamir government's
policies will begin to erode as the price hikes spread through the economy,
especially if wages and other income are not adjusted to compensate for higher
cent devaluation, convincing Israelis not to be left out this time.
The immediate impact on the economy will be higher prices. Inflation this year
will almost certainly exceed the 132.9-percent record set in 1980. US Embassy
contacts claim the inflation rate could be 160 percent. Finance Minister
Aridor's publicly stated intention to reduce cost-of-living adjustments threat-
ens the cushion Israelis have had against triple-digit inflation; if he is
unsuccessful, however, much of the impact of these new steps will be mitigated
prices.
Less Developed Countries
More Tough Talk In his first formal press conference since taking office last December,
in Mexico President de la Madrid last week reaffirmed his commitment to pragmatic
decisionmaking and tough economic stabilization policies. He rejected "dema-
goguery and populism," vast new foreign loans, and rapid oil development as
solutions for Mexico's financial problems, instead prescribing continued
austerity and reduced inflation as keys to eventual economic recovery. The
President indicated that, while 1984 will be a better year than 1983, the
standard of living will continue to fall below the levels of the recent past. He
cautioned against backsliding and suggested, in part by a rejection of price
freezes, reliance on free enterprise and a continuing prominent role for the
private sector.
De la Madrid's policy of looking for nonoil solutions to financial problems also
points to more realism in decisionmaking and is enhancing the President's
reputation for integrity and conservative planning. The President's downplay-
ing of oil led
to project that the new National Oil Plan to be
9 Secret
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
published this fall would scale back Mexico's estimated oil reserves 20 percent
or more. Top energy officials, however, discounted the speculation, emphasiz-
ing that Mexico had not changed its oil reserve estimates. We believe that new
Mexican oil officials are assessing oil reserves and may well downgrade
reserves. In any case, even a large cut in estimated oil reserves would almost
certainly not lower oil production or export capacity, or complicate ongoing
bank negotiations for 1984 financial support. Even if Mexico City decided to
lower oil and gas reserves 30 percent (from 72 billion barrels of oil equivalent
to 50 billion barrels), reserve levels would be adequate to satisfy domestic
consumption and allow a substantial boost in exports from current levels of
about 1.5 million b/d at least through the year 2000.
Mexican Progress More moderate consumer and wholesale price increases in recent months
on Inflation indicate that tough austerity measures are finally curbing inflation. After
rising at an annual rate of 100 percent during January through July, consumer
prices in August and September slowed to an annual rate of 51 percent.
Wholesale prices did even better, falling from an annual rate of 120 percent in
the first seven months of 1983 to an annual rate of just 31 percent in August
and September. Progress in slowing inflation has resulted from delaying price
decontrols and depressed demand. Domestic public-sector spending has
plunged 30 percent this year, and real wages for most nonunionized workers
are off by an equal amount.
During the last quarter of the year, we believe consumer and wholesale price
inflation will rebound a bit because of scheduled public-sector price adjust-
ments, steady depreciation of the "free" peso that began at the end of
September, and shortages caused by falling production and import restraints.
Thus we project December's price level to be 80 percent above December
1982.1
We believe President de la Madrid's goal of slashing inflation to the level of
that in major trading partners, as reaffirmed in his 5 October press conference,
will require sustaining harsh economic policies over the next several years.
Most important will be continuing fiscal restraint, including meeting IMF
targets for sharply cutting the public-sector deficit in 1984 and 1985. Keeping
a cap on wage increases also will be crucial and perhaps more difficult
politically. Forthcoming negotiations over the amount of the 1 January 1984
hike in minimum wages will be the next tough test.
Widening Economic According to the US Consulate, disruption of road and rail transportation in
Impact of Pakistani Sind Province has led to spot shortages in Karachi, to piling up of imported
Civil Disturbances goods at the port of Karachi, and to curtailment of fuel shipments to rural
areas. We believe a sustained interruption of highway and rail traffic or
attacks on gas and oil pipelines and the national electric grid would cause
significant shortages of consumer goods and disrupt industrial production in
Sind and other areas of Pakistan. Even without an increase in dissident
Secret
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
activity, the antigovernment protests already appear to have damaged Paki-
stan's longer term economic prospects. The current five-year plan is based
partly on a revival in the private sector, which is expected to contribute a
larger share of investment for industrial development. Fresh doubts about 25X1
Pakistan's long-term stability are likely to inhibit both foreign and local
investment in private industry; a recent survey indicates that small and
medium-sized Pakistani businesses already are drawing down bank assets=
India Revises In a preelection move to lower prices of consumer electronics, New Delhi has
Electronics Policy substantially reduced import duties on many electronic components and
lowered excise taxes on consumer goods and computers. The government also
has proposed the elimination of ceilings on production by private manufactur-
ers and plans to invest in high-technology industries. Press comment suggests
that officials may also believe that past restrictions on luxury consumer goods
have inhibited the development of electronics technology for defense indus-
tries. US exporters could gain if the new policies are implemented aggressively,
but greater Indian Government interest in electronics could also lead to
increased resentment of US export controls, which are designed to prevent
diversion of advanced technology to the Soviet Union.
Haitian Budget Haiti's recently released 1983/84 budget calls for a $10 million budget deficit,
comparable to the FY 1983 deficit but far below the deficits of the previous
three years. The government has announced a fiscal package designed to
improve income tax and customs duty collections and has switched some
ongoing programs from the development budget to the operating budget in an
effort to help cover a 10-percent increase in overall expenditures. In arelated
development, the Haitian Central Bank and its commercial arm, the National
Credit Bank (BNC), just completed a legal and financial separation initiated
two years ago under IMF pressure, which should theoretically restrict the
Haitian Government from using BNC funds to finance the budget deficit.
Laotian Concern Over At a party plenum in August, the Laotian Central Committee expressed
Economic Activity concern over the slow progress of the economy. According to recently available
information, the Committee decided to strengthen local economic administra-
tion by weeding out incompetent and corrupt officials but to refrain from
accelerating agricultural collectivization or the elimination of free market
activity. The regime apparently hopes to avoid repeating mistakes made in the
1970s, when an attempt to force collectivization and eliminate the free market
depressed food output and created a shortage of consumer goods. Actual
improvement in economic performance, however, is unlikely without some
measures to encourage production.
11 Secret
14 October 1983
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
International Financial Situation:
Political Stresspoints
The risks of disruptions in the international finan-
cial system have increased in recent weeks. Uncer-
tainty over the future level of IMF funding, cou-
pled with political unrest in a number of key
LDCs, underscores the fragile nature of the sys-
tem. We will continue to monitor economic and
political aspects of the international debt crisis.
Political strains continue to mount in several key
LDCs facing debt repayment problems. In some
cases the impact of austerity measures has sparked
unrest. Elsewhere, political turmoil is being driven
more by internal political divisions. Regardless of
the causes, political disruptions-given the fragile
state of banker confidence-run the risk of upset-
ting the delicate balance in the international finan-
cial arena.
Indeed, with economic recovery under way in the
United States and some other OECD nations, the
political situation in the major debt-plagued coun-
tries is probably the most worrisome aspect of the
international financial situation. Over the past few
weeks political clashes-including a number of
violent confrontations-have called into question
the status of financial rescue programs in several
key LDC debtors-Argentina, Brazil, the Philip-
pines, and Chile. While the situation in Mexico is
comparatively calm, it could deteriorate as the
current austerity program takes its toll.
Argentina
Barring a coup, most observers expect civilian
leaders to assume power following the 30 October
elections, ending seven years of military rule. The
preelection period has been marked by tension. The
military is concerned over its role in a new govern-
ment; labor unions have tried to wrest wage and
other concessions before a new government takes
power; and pressure from organized labor and
hardline nationalists is 'eo ardizin debt financing
programs An Argentine 25X1
judge temporarily blocked the rescheduling of
public-sector debt and briefly arrested the presi-
dent of the central bank for allegedly violating 25X1
national sovereignty by following the longstanding
practice of assigning to US courts jurisdiction
should disputes arise over US bank loans. Accord-
ing to the US Embassy, nationalist Air Force
officers were behind the judge's ruling and have
threatened to leave the junta over this issue. Unrest
in the other services has intensified as a result of
the injunction and tensions created by last week's
successful general strike. 25X1
25X1
The external debt will remain a contentious politi-
cal issue even after the civilians take office in
December or January. No matter which party-the
Peronists or the Radicals-assumes power, the debt
will undergo close scrutiny. Both major contenders
have promised to honor debt obligations, but will
probably attempt to placate nationalists by adopt-
ing a tough posture toward lenders. Despite man-
dated austerity programs and repayment schedules,
their primary goal is to revitalize the economy.
Sentiment for a repudiation of the $40 billion debt
could grow if the banks cut off credits because of
noncompliance; the government could try to use the 25X1
threat of repudiation as a lever for better terms.
President Figueiredo's administration appears
adrift. The tough austerity measures mandated by
the IMF have sparked food riots and labor unrest.
Secret
DI IEEW 83-041
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Opposition leaders have used these incidents to
garner congressional support against the govern-
ment's austerity measures. Moreover, economic
dissatisfaction has spread to the middle class, the
business community, and the middle echelons of
the armed forces. Widely publicized statements by
prominent business leaders criticizing the govern-
ment's handling of the economic crisis underscore
this shift. The country's precarious international
payments situation has prompted major political
and business groups, as well as a majority of federal
deputies, to call for a moratorium on debt repay-
ments aimed at forcing foreign bank creditors to
reduce interest charges and lengthen repayment
periods.
The growing political backlash could force Brasilia
to soften its pledge to cut spending and impose
wage restraints, which the IMF and foreign bank-
ers are insisting on as preconditions for additional
financial help. Although Brazil and its creditor
bank advisory committee announced preliminary
agreement last week on a new $12 billion medium-
term financial package-with easier terms than
were negotiated early this year-final agreement
remains in doubt. Already Figueiredo, fearing con-
gressional rejection of his wage restraint law, has
publicly stated that he will consider proposals for
alternative plans. Moreover, many bankers are
becoming increasingly reluctant to come up with
their share of the overall package.
Philippines
President Marcos's regime is beset by political and
financial woes as key interest groups such as the
business community, the middle class, and orga-
nized labor withdraw their support. The latest blow
to the prestige of the regime was the mass resigna-
tion on 10 October of members appointed to the
commission investigating the assassination of
Benigno Aquino.
we believe the senior officer
corps remains loyal and Marcos's security forces
are intact. The opposition has proven itself capable
Secret
14 October 1983
of sustaining the pressure on the President by
conducting almost daily antigovernment rallies and
demonstrations throughout Manila and elsewhere
in the country.
The outlook is for continued disaffection from the
regime, possibly intensified by government finan-
cial problems. Although Marcos announced price
freezes to moderate the impact of the 21-percent
devaluation of the peso last week, public reaction to
this and other austerity measures is bound to be
sharp. The possibility of default on debt repayment
obligations would further complicate Marcos's po-
litical problems.
In Chile, the growth of a strong opposition move-
ment has been fueled by recession and President
Pinochet's reluctance to accelerate the timetable
for returning the country to civilian rule before
1989. Political and labor coalitions have sponsored
"days of national protest" each month since May
and two national strikes. The massive protest in
Santiago this week highlights the underlying un-
rest. Security forces have responded sternly; 49
civilian protesters had been killed as of mid-Sep-
tember. The protests have led moderates inside the
government to press Pinochet to grant concessions;
he has lifted the state of emergency and is consider-
ing holding a plebiscite to amend the 1980 constitu-
tion and allow the election of a congress before
1989.
While the dispute between the government and
opposition groups has centered on political rather
than economic conditions, Chile's economy has
been in a nosedive. GNP dropped 14 percent in
1982, and we expect another 4 to 5 percent decline
this year. Opposition groups are charging that the
government has gone overboard in meeting IMF
targets, making the situation even worse. While
Chile has arranged the foreign financing most
25X1
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
observers believe it will need through 1984, agree-
ments with the Fund and bankers could unravel if
the goverment is forced to ease up in response to
political unrest.
The Mexican political climate has improved in the
last few months. This is due to the President's
political skills, the ruling party's sophistication, and
the government's success rekindling some faith in
the economy. The important labor sector continues
to support the government, but the rank and file
expect some rewards, such as more effective price
controls or other non-wage benefits, for their sacri-
fice. The largest opposition organization, the cen-
ter-right National Action Party, has made some
headway in exploiting the crisis, but similar at-
tempts by leftist parties have foundered on internal
divisions and disorganization.
Violence has been avoided, but small-scale peasant
and student protests in October reflect the continu-
ing potential for unrest. Early in the month, peas-
ants seized government vehicles and blocked access
to oil facilities to protest the government's failure to
pay compensation for damage to farm land. As a
result, some 300 wells were temporarily shut in.
Two days later, students marched in downtown
Mexico City to protest austerity mesures and com-
memorate the 1968 student violence. Several fire-
bombs were tossed at the National Palace but
caused no significant damage. Overall, the de la
Madrid administration has had few problems in
controlling protests and demonstrations. Opposition
leftists' ability to rally support for a national strike
against austerity on 18 October will serve as an
indicator of progress in overcoming internal disuni-
ty and as a gauge of discontent.
15 Secret
14 October 1983
25X1
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
The Philippines: Flirting
With a Financial Fall
Despite Manila's devaluation of the peso last week
and its new round of financial austerity measures,
the Philippines faces a severe liquidity crisis. The
government must restructure $4.2 billion in short-
term debt owed by financial institutions and line up
a new medium- to long-term "jumbo" loan by
January-its traditional foreign borrowing season.
If the government fails either of these tests, re-
scheduling or payments arrearages are likely. Even
under the best circumstances, the economy is likely
to grow more slowly as the price of financial
adjustment, and this will add to President Marcos's
already formidable political problems
Financial Developments in Early 1983
The Philippines has not experienced the dramatic
reversal in its external payments fortunes that
policymakers have counted on. Many of the inter-
national economic events that Manila has hoped for
have materialized, but even with lower internation-
al oil prices, weakening global interest rates, and
firming commodity export prices, the current ac-
count shows little sign of improvement from the
$3.3 billion record deficit in 1982. Drought during
the first half of the year has compounded already
bleak current account prospects for the rest of 1983
by requiring unanticipated imports of corn and
reducing exports of coconut products.
Interest payments on the $22.7 billion foreign debt
for the first time have replaced oil imports as the
single largest drain on the country's financial re-
sources. Moreover, Manila's ability to finance the
stubborn trade gap has sustained critical damage;
Prime Minister Virata told US officials in June
that private credit commitments to Philippine bor-
rowers had contracted by $700 million since late
1982. Despite a $375 million balance-of-payments
The Philippines: Foreign Debt, Millions US $
June 1983
22,700
14,000
9,735
1,363
3,284
2,098
1,186
3,563
1,002
Private 4,265
Private banks 3,665
Supplier credits 600
Short term, owed by nonbanks 4,460
Revolving trade credits 4,460
Short term, owed by financial institutions b 4,240
Central Bank 2,157
a Including World Bank.
b Reserve financing.
c Net, liabilities $5,183 million, assets $3,100 million.
standby loan and a $205 million Compensatory
Financing Facility from the IMF, Central Bank
liquidity has plummeted sharply. The Central
Bank's cash position became so serious in April
that it began to resort to overnight loans to accom-
plish daily clearing operations and prevent pay-
ments arrearages on its own $2.2 billion short-term
foreign debt.
Secret
DI IEEW 83-041
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Current account
-1,576
-2,072
-2,589
-3,347
-2,900
Merchandise trade
-1,541
-1,939
-2,667
-2,805
-2,450
Exports (f.o.b.)
4,601
5,788
5,733
4,995
4,600
Of which:
965
759
756
647
550
Sugar
238
474
609
324
400
Copper concentrates
330
679
544
340
500
Forest products
484
433
383
340
400
Manufactures
1,520
1,135
1,294
1,050
1,245
6,142
7,727
8,400
7,800
7,050
Oil
1,385
2,248
2,458
2,396
2,190
Other
4,757
5,479
5,942
5,404
4,860
Services (net)
-390
-555
-392
-992
-900
Interest payments
-591
-846
-1,101
-1,811
-2,200
Other
201
291
709
819
1,300
Transfers (net)
355
422
470
450
450
Capital account
997
1,720
2,029
2,212
1,800
Direct investment (net)
99
49
407
259
400
Medium- and long-term loans (net)
1,061
1,044
1,185
1,252
1,350
Short-term loans b (net)
-193
446
37
423
50
Balance
-579
-352
-560
-1,135
-1,100
a Projection based on first three quarters.
b Including errors and omissions.
The government began the first in a series of "last
ditch" efforts to avert financial crisis in midyear.
Manila devalued the peso by 7 percent, raised
commercial bank reserve requirements to rein in
private liquidity, canceled five large industrial pro-
jects, and scrapped the Consumer Price Equaliza-
tion Fund-its social pricing scheme for subsidiz-
ing domestic oil products-in favor of a 10-percent Austerity Amid Political Crisis
price increase.
Secret
14 October 1983
Political events associated with the assassination of
opposition leader Benigno Aquino in August have
removed all remaining financial breathing room for
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
the Marcos government. Preliminary data show
that the balance-of-payments deficit for the third
quarter alone reached $659 million, bringing the
total for the first three quarters to an unprecedent-
ed $1.4 billion. Senior government officials have
told the US Embassy that a "bunching" of repay-
ment obligations is making Central Bank clearing
operations difficult. Mounting arrearages by pri-
vate Philippine borrowers are also adding to foreign
bankers' anxieties about their Philippine portfolios,
and several short-lived runs on the Philippine bank-
ing system have forced Central Bank authorities to
revive an emergency funding facility used during a
financial crisis in 1981.
Although major US banks remain committed to
rolling over maturing short-term loan obligations,
reporting suggests Japanese and West European
banks are reacting to the recent antigovernment
demonstrations in Manila by withdrawing from the
Philippine loan market. In the third quarter alone,
foreign banks terminated $493 million in short-
term loans. According to excellent sources, the
maturity of the short-term debt also has contracted
sharply from 180- and 270-day financing to 30-
and 60-day credits. The spread private banks have
charged to roll over existing credits has nearly
tripled to almost 2 percentage points over LIBOR.
Manila is implementing further financial belt-
tightening measures in an effort to cope. The 1984
budget announced in September calls for a 34-
percent reduction in capital spending, and alloca-
tions for the fourth quarter of 1983 are being
drastically reduced. Rewards are being offered to
Filipinos reporting illegal foreign exchange smug-
gling, and new Central Bank and Board of Invest-
ment restrictions on capital good imports are in
place.
Manila is also aggressive-
ly pushing sales of new Treasury bills on an
unenthusiastic business elite and in Japanese finan-
cial markets in a desperate effort to raise $500
Secret
Total balance-of-payments
579 352
560
1,135
1,441
deficit
Net IMF drawings
93 217
94
-123
243
Central Bank
-31 466
859
1,141
550
Net, commercial
517 -331
-393
117
648
bank
million, while sounding out Central Banks in Jakar-
ta, Bangkok, Kuala Lumpur, and Singapore for
emergency foreign exchange swap arrangements.
Manila's recent differences with the IMF have led
to even more drastic financial policy changes. The
Fund suspended disbursements under an existing
standby in early September when it determined
that Manila was out of compliance with restrictions
on domestic credit creation. Since then, Manila has
sought to have disbursements resume and to secure
a standby for 1984 by implementing new austerity
measures advocated by the Fund. Believing that
they are in no position to bargain for more political-
ly palatable policy adjustments, Manila has also
implemented a strongly resisted 21-percent devalu-
ation of the peso and plans additional controls on
imports and domestic credit creation. These meas-
ures comprise the harshest austerity since the gov-
ernment was forced to reschedule its debts in 1970.
Secret
14 October 1983
25X1
25X1
25X1
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
The Liquidity Management Problem
Manila's present financial difficulty is a product of
Central Bank reserve management practices since
1979. The Philippines has accumulated balance-of-
payments deficits equal to $4.1 billion during this
period at a time when Central Bank reserves fell
only $600 million. The IMF has contributed $504
million of the required financing. The rest has been
produced by short-term borrowing by the Central
Bank and peso-dollar "swap" facilities that allowed
the Central Bank to drain the commercial banking
system of foreign assets. As a result of these
practices, the Central Bank in June 1983 owed
short-term obligations of about $2.2 billion and the
commercial banking system has accumulated a net
short-term foreign debt of about $2 billion.
Central Bank liquidity is even more seriously
strained than official data suggest. Manila has
raised cash this year by pledging its gold reserves
against futures contracts, and at one point faced
the need to repurchase $400 million of its own gold
reserves or sell its remaining gold stock. In addi-
tion, all but a few hundred million of its foreign
exchange reserves had been pledged as compensat-
ing balances against previously obtained foreign
loans as a means of keeping financing costs down.
The Bank almost certainly has now exhausted its
traditional mechanisms for financing reserves.
June's small devaluation did little to ease pressure
on Central Bank reserves, and September's political
disturbances reportedly accelerated capital flight.
Manila ran down its foreign exchange accounts by
$170 million during July-August and sold gold
equal to about $150 million to defend the peso.
Last week's 21-percent devaluation was the first
decisive step in restoring the Central Bank's fi-
nances and placing the country's broader external
Secret
14 October 1983
accounts on surer footing. Manila still faces the
need to refinance the Central Bank's short-term
debt and "wind down" the banking system's swap
obligations. This requires restructuring about $4.2
billion in short-term debt that is an outgrowth of
previous reserve financing practices. Manila is al-
most certainly considering rescheduling these cred-
its, but we believe the devaluation is intended to
produce overall payments surpluses in the months
ahead, permitting the Central Bank to restructure
the obligations quietly and thus minimize damage
to its creditworthiness.
With the Central Bank currently resorting to over-
night loans to meet its commitments, it is nonethe-
less likely that rescheduling will occur in the next
several weeks. Prime Minister Virata and Central
Bank Governor Laya reportedly are meeting with
several major New York banks this week to consid-
er the options. The US Embassy in Manila specu-
lates that the meetings may conclude that resched-
uling is inevitable.
Manila is
continuing efforts to obtain cash on a short-term
basis in order to avert payments arrearages, and
this may include further appeals for US Govern-
ment assistance. Manila did not previously qualify
for an Exchange Stabilization Fund credit because
it had no future source of new funds to bridge to. It
probably now believes it has a good case because of
a likely agreement with the IMF for a $650
million, 15-month standby that will replace the
current loan and carry through the end of 1984.
Manila is also likely to cite the near certainty of
obtaining a third Structural Adjustment Loan from
the World Bank, which would probably accompany
the new IMF standby, as another source of fresh
financing in arguing its case with the United
States.
If the financial bubble does not burst in the
interim, the next critical hurdle for the Central
Bank will be securing a medium- to long-term
"jumbo" loan in early 1984, the Bank's traditional
borrowing season. Few private banks would have
considered a new loan request before last week's
25X1
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
devaluation, but restoring Central Bank liquidity
will require that a new loan be successfully negoti-
ated if another crunch is to be averted sometime in
early 1984. If Manila determines in the meantime
that the new loan is not feasible, rescheduling is
almost certain.
How Painful a Long-Term Adjustment?
If Manila survives its current troubles, its long-
term prospects are far less bleak. With recovery in
the Philippines' traditional export markets on the
horizon, we believe that Manila has finally put in
place a policy reform package that can generate
successful adjustment in the economy. The World
Bank's Structural Adjustment Program has al-
ready gone a long way to reduce tariffs and
streamline the manufacturing sector. Price distor-
tions for domestic energy products have-with the
exception of those for electricity-largely been
eliminated. However painful the inflationary im-
pact in the short run, the October devaluation will
accomplish more than any single measure in restor-
ing stability to the country's external accounts.F_
Even so, several years will be required before
imports can resume the pace of expansion required
for the 6-percent annual growth the Philippines
averaged in the 1970s. The manufacturing sector is
responsible for most of the foreign debt buildup of
the late 1970s and early 1980s, and it will have to
absorb the pain of financial adjustment for some
time to come. Manila thus faces a prolonged period
of austerity at a time the labor force is growing
rapidly, and this does not bode well for political
stability
21 Secret
14 October 1983
25X1
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
Indonesia: The Painful Consequences
of Financial Austerity
Indonesia is experiencing its second consecutive
year of declining export earnings and slower growth
as the world oil glut and sluggish commodity
markets persist. The government has adopted tough
austerity measures to counter its financial difficul-
ties; real economic growth in 1983 appears likely to
fall below the 2.2 percent registered in 1982.
Austerity and the sluggish economy are compound-
ing social strains by reducing real incomes and
increasing unemployment. With the labor force
growing by nearly 2 million workers a year, rising
unemployment, particularly among younger work-
ers, has contributed to increased labor restiveness
and to an upsurge in violent crime. As matters now
stand, the government is walking a tightrope bet-
ween keeping a lid on these tensions and waiting for
a strong recovery in the world economy.
Sharp Policy Shift
President Soeharto is moving aggressively to
counter the deterioration in Indonesia's financial
position. To avoid depleting foreign exchange re-
serves and to preserve its international credit stand-
ing, Jakarta has taken a number of steps so far this
year:
? An austere budget was announced last January,
which included sharp reductions in subsidies for
fuel, food, and fertilizer, a continuing government
pay freeze, and a squeeze on most other govern-
ment spending.
? A 28-percent devaluation on 30 March restored
the competitiveness of the rupiah lost since the
previous devaluation in November 1978.
? A rescheduling of large-scale, import-intensive
industrial projects valued at over $21 billion has
postponed some projects and canceled others; this
will save $3 billion in foreign exchange expendi-
tures in 1983-84 and an additional $7 billion in
subsequent years.
? Banking reforms are designed to encourage do-
mestic saving and investment by liberalizing the
complex regulatory system. In addition, the gov-
ernment is preparing a comprehensive tax reform
intended to broaden the tax base, reduce Jakar-
ta's dependence on oil revenues which now ac-
count for 60 percent of government receipts, and
improve tax administration.
The austerity program has won praise from foreign
bankers and lenders, reversed the capital flight that
occurred earlier this year, and appears to be hold-
ing down the current account deficit by slashing 25X1
imports. According to US Embassy reporting, offi-
cial foreign exchange reserves have recovered to
about $4 billion, and net foreign assets of the
banking system have remained at about $3.5 bil-
lion. If the government sticks with its program, we
believe Jakarta can hold the 1983-84 current ac-
count deficit to less than last year $6.5 billion and
gradually reduce the deficit in subsequent years.
Jakarta's current economic policy stance represents
an effort by the technocrats under the leadership of
Economics Coordinating Minister Ali Wardhana to
balance the need to maintain Indonesia's interna-
tional creditworthiness against the need for eco-
nomic growth and jobs for the labor force. In our
judgment Jakarta can hold to its current strategy
for the next year or two, but the technocrats are
relying on recovery in the world economy to restore
export earnings and permit a resumption of rela-
tively rapid growth.
Secret
DI IEEW 83-041
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Sluggish Economic Performance Continues
Jakarta's reliance on spending and import re-
straints to avoid a worsening financial position is a
drag on Indonesia's economic growth. With oil and
LNG accounting for over 80 percent of export
earnings, the sluggish world oil market had already
reduced the impetus to growth. Oil export volumes
remain close to the 1.3-million-b/d quota adopted
in March 1982, but earnings are below 1982 levels
because of the OPEC price cut last March. LNG
export earnings are down as a result of the indexing
to oil prices, a drop in volume caused by reduced
spot purchases by Japanese buyers, and an accident
at the Bontang plant in Kalimantan last April that
knocked out one of the country's five LNG produc-
tion units for the rest of 1983. Although Indonesia
has increased exports of some goods such as ply-
wood, rubber products, and textiles over the de-
pressed levels of 1982, world demand remains
generally soft for primary commodities, which ac-
count for 15 percent of Indonesia's exports
The manufacturing sector at best will achieve only
modest gains this year. The government has
followed an import-substitution industrial develop-
ment strategy, and domestic manufacturers typi-
cally sell more than 90 percent of their output in
heavily protected domestic markets. Because of
depressed incomes, domestic demand for manufac-
tured goods continues to be sluggish.
Agriculture remains a question mark. After record-
ing gains averaging more than 8 percent annually
for the preceding three years, rice output in 1982
grew close to the long-term average of 4 percent.
Drought delayed planting of the main 1983 rice
crop, which will result in a further slowdown in rice
output growth this year. These developments have
forced Jakarta to resume large-scale rice imports
this year after attaining near self-sufficiency in rice
production. Even if a return to more normal weath-
er permits timely planting of the main 1984 crop in
the next two months, Jakarta will need to continue
large-scale imports to rebuild its rice stocks.
Secret
14 October 1983
Social Costs of Austerity
The cutbacks in government spending and the
industrial development program are helping to pro-
tect the country's international financial position at
the expense of increasing economic hardship for the
populace. Real incomes have fallen as a result of
the cutbacks in fuel and food subsidies, the govern-
ment-wide wage freeze, the devaluation, and rising
unemployment. Although government officials
have said they intend to divert some of the savings
from the canceled industrial projects to more labor-
intensive construction projects, in our judgment
Jakarta is unlikely to create enough jobs to employ
all the displaced workers.
Layoffs are compounding the problem of creating
jobs for the fast-growing labor force. Although the
government's official figure for unemployment was
only 4 percent in early 1983, it drastically under-
states the problem. The US Embassy estimates that
at least 20 to 25 percent of the labor force is
effectively unemployed, with younger workers suf-
fering most severely. A World Bank study calculat-
ed that 40 percent of urban males and 76 percent of
urban females in the 20 to 24 age bracket were out
of work in 1980 even before the current recession.
Layoffs in rubber, coffee, and other plantations, as
well as manufacturing industries, in the past two
years have put more than 250,000 people out of
work.
Besides increased labor unrest, many observers
attribute an upsurge in violent crime to the rise in
unemployment. The government has responded to
the crime wave with a campaign of summary
shootings .of "known criminals" by four-member
military squads that have probably killed over
1,200 suspects this year. Although the government
ordered a halt to the killings in August, many
observers believe the campaign is continuing, al-
though on a reduced scale.
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
We expect that the depressed world oil market and
sluggish growth in rice output will result in eco-
nomic stagnation in 1983. Efforts to promote pri-
vate domestic investment and to attract foreign
investment are not likely to be sufficient to offset
the reductions in export earnings or government
spending. Growth probably will resume in 1984,
but at a considerably slower pace than the 1970s.
Indeed, President Soeharto last August said he
expects the economy to grow only 5 percent annual-
ly in the next five years, a, rate the World Bank
considers too slow to create enough jobs for the
rapidly growing labor force. Slower growth will
limit job opportunities for new entrants to the labor
force and, indeed, could increase hardships for
workers displaced by the slowdown in the industrial
development program.
The Soeharto government probably will have to
deal with increasing dissatisfaction among students
and other youths whose prospects now seem poorer
than at any time in the past decade. Growing social
discontent in our view is most likely to manifest
itself in anti-Chinese riots, which could erupt at
any time in Indonesia's cities from seemingly ran-
dom incidents as happened in Central Java in 1980.
Orthodox Muslim distaste for the Soeharto regime
could also lead to clashes directed against the
government.
Soeharto's austerity program thus carries political
costs that will be incurred before the potential
benefits can be realized. The technocrats can offer
no guarantee that their policies will cause faster
growth or reduce unemployment; Indonesia re-
mains dependent on volatile world commodity mar-
kets and the weather. If economic recovery should
stall, we believe the technocrats would face increas-
ing criticism from both anti-Western populist-
oriented advocates of rural development and propo-
nents of continuing investment in large capital-
intensive projects. The social strains already evi-
dent in the form of rising unemployment and urban
crime would increase pressure on Soeharto to ease
restrictive economic policies.
In our view, Soeharto has adopted the technocrats'
belt-tightening program to avoid problems other
debt-burdened countries have encountered. We be-
lieve he is willing to risk the political unpopularity
of government spending cuts as long as he sees a
prospect of economic recovery in the not-too-
distant future. He has appointed hardliners to key
cabinet posts such as the Ministries of Labor,
Education, and Defense to suppress any opposition
to his policies. If the economic recovery falters,
however, Soeharto could make the technocrats the
political scapegoats for the seeming failure of their
policies and resort to more repressive policies to
stifle dissent.p
Secret
14 October 1983
25X1
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
Yen Appreciation and Japan's
Current Account Surplus
With Japan's current account surplus headed for
record levels this year and likely to expand further
in 1984, Tokyo has grown increasingly concerned
about protectionism in key foreign markets, partic-
ularly the United States. While past surpluses have
been cut by large increases in raw material import
prices such as the large oil price hikes of 1973 and
1979, most observers believe such increases are
unlikely in the near future. For their part, Japanese
officials apparently believe that yen appreciation
would moderate foreign protectionist sentiment as
well as reduce foreign efforts to enlarge access to
Japanese markets. We believe, however, that yen
appreciation to the range of 200 to 175 per dollar
that most observers now think is reasonable would
do little to improve the current account situation.
Indeed, over the next year-a period when the
political agenda in Japan's major trading partners
could produce strong protectionist forces-rapid
yen appreciation would temporarily add to Japan's
current account surplus rather than reduce it. Only
a rapid runup in raw material prices, a radical
change in Japan's capital account, or a much larger
yen appreciation than is now foreseen would con-
tain the surplus.
The Surplus
We believe the 1983 current account surplus will
more than triple last year's $6.9 billion level.
Lower oil prices are responsible for an estimated
$7-8 billion of the increase. Sluggish import de-
mand, a reflection of the slack Japanese economy,
is a secondary factor. On the export side, ship-
ments have been rising since May, largely because
of the yen's weakness and the recovery in Japan's
number-one export market, the United States.
Japanese policymakers are aware of the foreign
policy problems posed by the burgeoning surplus,
but they have few acceptable options for limiting its
growth. In September, the Nakasone government
announced that import-promotion policies would be
introduced, but we believe these will be mainly
symbolic. Most Japanese leaders believe that stim-
ulating domestic economic growth is a partial
solution but doubt that it can be done on a large
enough scale to make much of a dent in the surplus-
Because of Tokyo's already large fiscal deficit, 25X1
there is no support for a significant chan a in tax
policy beyond a small income tax cut.
Most analysts in Japan believe that the weak yen is
the underlying source of the current account sur-
plus. Policymakers are now reviewing options for
strengthening the yen
25X1
25X1
Most foreign observers agree with Tokyo that the
yen is undervalued and that yen appreciation will 25X1
erode Japan's huge current account surplus.
Secret
DI IEEW 83-041
14 October 1983
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Although few agree on what level the yen should
reach, most believe it should be less than 200 to the
dollar. Data Resources Incorporated, for example,
believes the equilibrium rate-the rate that would
eliminate Japan's cost advantage-is 200 to 180
yen per dollar. Labor unions and some US firms
argue that it is closer to 175.
To test the impact of yen appreciation on Japan's
current account surplus we used the CIA Linked
Policy Impact Model. None of our scenarios as-
sumes any change in this year's surplus. Our
baseline projection assumes that the,yen appreci-
ates slowly from 243 to the dollar in 1983 to 227
and 212 yen per dollar in 1984 and 1985, respec-
tively. Using these rates, the current account sur-
plus expands slightly to $24 billion in 1984 and
grows rapidly after that.
Against the baseline case we tested A scenario of
more rapid appreciation with a yen value of 200 to
the dollar in 1984 and 180 in 1985. Neither
scenario brings Japan's current account surplus
closer to balance within these two years. Under the
rapid appreciation scenario the 1984 surplus would
be about $10 billion above the baseline projection
and in 1985 nearly $1 billion above. The growth of
the surplus reflects delays in the ability of the
market to adjust to the increased dollar price of
Japanese goods. The initial decline in export vol-
ume is slight, so the dollar value of exports in-
creases as Japanese businesses raise dollar prices to
offset lost profits due to the appreciation. By 1986,
however, the surplus is nearly $7 billion less than in
the baseline case as the impact on export volume
catches up with the price factor and the more rapid
yen appreciation finally results in a decline in the
surplus.
Steep runups in raw material prices have turned
large Japanese current account surpluses into defi-
cits twice in the last decade. In the absence of an
external interruption in supply, however, raw mate-
rial prices are unlikely to rise rapidly enough to
narrow the surplus. Moreover, changes in Japan's
Secret
14 October 1983
Japan: Effects of Yen Appreciation
on Current Account Surplus
Rapid
appreciation
I I I I I
0 1982 83 84 85 86
industrial structure have reduced import require-
ments for oil, copper, iron ore, coking coal, and
other materials. Crude oil import requirements, for
example, are now 3.5 million barrels per day
compared to 4.9 million in 1973-74.
Another possibility is that the surge in capital
outflows that has helped depress the yen in recent
years will slow. If US interest rates have peaked,
US financial markets would begin to look less
attractive. Indeed, some of the capital that has
flowed to the United States in the last two years
might return to Japan, thus strengthening the yen.
A third possibility is that we are underestimating
the scale of potential yen appreciation. In previous
periods of rapid appreciation, the yen has risen far
higher than most observers expected. In late 1977
when the yen broke the 240 to the dollar mark,
25X1
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
almost all market participants thought that it had
peaked. A year later it broke 180 to the dollar. A
rise in the yen toward 200 to the dollar could set in
motion inward flows of speculative funds that could
push the yen far beyond the 180 mark. Under such
a scenario the turnaround in export volume might
occur much sooner, and import demand could rise
sharply, thus reducing the massive current account
surplus.
Our analysis shows that an appreciation of the yen
to the range foreseen by most observers will be
insufficient to erode the current account surplus.
Should none of the above developments occur,
political pressure will mount on Tokyo to take more
direct action.
29 Secret
14 October 1983
25X1
25X1
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
 Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0
Secret
Secret
Sanitized Copy Approved for Release 2011/02/18: CIA-RDP84-00898R000300140009-0